Shipping Corp sailing through choppy seas

It’s well known that oversupply of ships has wreaked havoc on freight rates, affecting the performance of shipping companies. The challenging operating environment took a toll on Shipping Corp. of India Ltd’s (SCI) June quarter financials and the company posted a net loss for the second quarter in a row.

SCI has been posting a net loss of about Rs6 crore each for the past two quarters, compared with profit in the year-earlier quarters.

In both the quarters, the liner business, which includes break bulk and container transport, had posted an earnings before interest and tax (Ebit) loss. But liner Ebit loss expanded considerably in the June quarter to Rs61 crore from Rs18 crore in the March quarter.

Liner segment revenue increased by just 1% over the same period last year, while that of the bulk segment increased by 3.5%. The bulk segment includes tankers (crude and product), dry bulk carriers, gas and phosphoric acid carriers. As a result, total revenue increased by a paltry 2.5% on a year-on-year basis to Rs930 crore.

Even as revenue growth was poor, costs offered little respite, especially bunker (fuel for vessels) costs, which have increased sharply by 61% compared with a year ago. Cargo handling expenses and port dues, too, have increased substantially.

Accordingly, SCI’s operating profit margin dropped sharply to 8% from as high as 24.6% in the same period last year. Operating margin in the March quarter, too, was higher at 11.6%. “With Baltic Dry Index at 1,400 levels and very large crude carriers spot freight rates at $12,000 (around Rs5.5 lakh today) per day, we believe the company is currently operating some of the ships in its fleet at below operating cost,” Kotak Securities Ltd analysts said in a note after the results announcement.

For the June quarter, apart from the fact that the operating performance was weak, higher depreciation costs and interest expenses also affected net performance. This could have been worse had it not been for the 10% growth in other income—including interest income, other operating income and profit on sale of ships—to Rs111 crore.

Given the environment, it’s not surprising that the SCI stock has underperformed the BSE-200 index in the last one year. After two consecutive loss-making quarters, outlook for shipping companies still looks subdued. With analysts expecting shipping asset prices to remain under pressure for some time, there is little to boost investor sentiment.